Managing the Merchandise Planning Process CHAPTER 12

Merchandise Management

Merchandise Management Managing the Merchandise Planning Process Buying Merchandise Retail Pricing Retail Communication Mix

Questions What is the merchandise management process? How are merchandise management processes different for staple and fashion merchandise? How do retailers forecast sales for merchandise categories? What trade-offs do buyers consider in developing merchandise assortments? How do retailers plan their assortments and determine the appropriate inventory levels? How do multistore retailers allocate merchandise to stores? How do retailers evaluate the performance of their merchandise management process?

Merchandise Management Process by which a retailer offers the correct quantity of the right merchandise in the right place at the right time and meets the company’s financial goals. Sense market trends Analyze sales data Make appropriate adjustments in prices and inventory levels c) image100/PunchStock

Merchandise Management and Investment Portfolio Management Dollars to invest in inventory Invest in “hot” merchandise Save a little for opportunities (open to buy) Monitor portfolio of merchandise (stocks) Sell losers (markdowns) Traders on the stock exchange floor manage a portfolio of stocks, and retail buyers manage a portfolio of merchandise inventory. Both continuously assess the risks associated with their purchase decisions.

Buying Organization Merchandise Group Department Classification Each merchandise group is managed by a general merchandise manager (GMM),senior VP Department Departments are managed by a divisional merchandise manager (DMM), Classification A group of items targeting the same customer type, such as girls’ sizes 4-6 Each buyer manages several merchandise categories (e.g., sportswear, dresses, swimwear, outerwear categories for girls’ sizes 4-6 Category SKU The smallest unit available for inventory control Size, color, style

Merchandise Category – The Planning Unit A merchandise category is an assortment of items that customers see as substitutes for each other. Vendors might assign products to different categories based on differences in product attributes Retailers might assign two products to the same category based upon common consumers and buying behavior

Category Management The process of managing a retail business with the objective of maximizing the sales and profits of a category Objective is to maximize the sales and profits of the entire category, not just a particular brand Breakfast cereal category vs. Kellogg Corn Flakes Men’s knitted shirts vs. Polo shirts Diary product category vs. Carnation milk products

Category Captain Selected vendor responsible for managing a category Vendors frequently have more information and analytical skills about the category in which they compete than retailers Helps retailer understand consumer behavior Creates assortments that satisfy the customer Improves profitability of category Problems Vendor category captain may have different goals than retailer

Evaluating Merchandise Management Performance - GMROI Merchandise managers have control over The merchandise they buy The price at which the merchandise is sold The cost of the merchandise Merchandise managers do not have control over Operating expenses Human resources Real estate Supply chain management Information systems SO HOW ARE MERCHANTS EVALUATED?

GMROI Gross Margin Return on Investment GMROI = Gross Margin Percent x sales-to-stock ratio = gross margin x net sales net sales avg inventory at cost = gross margin avg inventory at cost Inventory Turnover = (1 – Gross Margin Percent) x sales-to-stock ratio

How do buyers influence GMROI? Components that buyers can control: Gross margin component: Price: Prices that buyers set Prices that buyers negotiate with vendors Sales-to-stock ratio component: Popularity of the merchandise buyers buy

ROI and GMROI Asset Productivity Measures Strategic Corporate Level Return on Assets = Net Profit Total Assets Merchandise Management Level GMROI = Gross Margin Avg. Inventory at Cost

Measuring Sales-to-Stock Ratio Net Sales/Average Inventory at Cost Retailers report on an annual basis If the sales-to-stock ratio for a three-month season is 2.3, the annual sales-to-stock ratio will be 9.2 Estimation of average inventory Use information system: averaging the inventory in stores and distribution centers at the end of each day Divide the sum of the end-of-month (EOM) inventories for several months by the number of months

Managing Inventory Turnover Inventory Turnover helps assess the buyer’s performance in managing asset (merchandise inventory) But focusing on increasing inventory turnover can actually decrease RMROI Buyers need to consider the trade-offs associated with managing Inventory Turnover Inventory turnover = Net Sales Average inventory at retail Inventory turnover = Cost of goods sold Average inventory at cost Average inventory = Month1 + Month2 + Month 3 +… Number of months

Merchandise Planning Process

Types of Merchandise Management Planning Processes Two distinct types of merchandise management systems for managing Staple (Basic) Merchandise Categories Continuous demand over an extended time period Limited number of new product introductions Hosiery, basic casual apparel Easy to forecast demand Continuous replenishment Fashion Merchandise Categories In demand for a relatively short period of time Continuous introductions of new products, making existing products obsolete Athletic shoes, laptop computers, women’s apparel Discussed in Chapter 13 in detail

Merchandise Management Process Forecasting sales Developing an assortment plan Determining the appropriate inventory level

Developing a Sales Forecast Understanding the nature of the product life cycle Collecting data on sales of product and comparable products Using statistical techniques to project sales Work with vendors to coordinate manufacturing and merchandise delivery with forecasted demand (CPFR)

Types of Merchandise Staple Merchandise Predictable Demand History of Past Sales Relatively Accurate Forecasts Fashion Merchandise Unpredictable Demand Limited Sales History Difficult to Forecast Sales The McGraw-Hill Companies, Inc./Lars A. Niki, photographer The McGraw-Hill Companies Inc./Ken Cavanagh Photographer

Forecasting Staple Merchandise Based on extrapolating historical sales because sales are constant from year to year

Factors Affecting Sales Projections Controllable Uncontrollable Promotions Store Locations Merchandise Placement Cannibalization Seasonality Weather Competitive Activity Product Availability Economic Conditions

Forecasting Fashion Merchandise Categories Retailers develop fashion forecasts by relying on: Previous sales data Personal awareness Fashion and trend services Vendors Traditional market research

Developing an Assortment Plan Assortment plan is a list of the SKUs that a retailer will offer in a merchandise category and reflects the variety and assortment that the retailer plans to offer in a merchandise category Variety (breadth) is the number of different merchandising categories within a store or department Assortment (depth) is the number of SKUs within a category. Product availability defines the percentage of demand for a particular SKU that is satisfied.

Determining Variety and Assortment Buyers consider Retail strategy The number of SKUs to offer in a merchandise category is a strategic decision GMROI of the merchandise mix Trade-off between too much versus too little assortment Increasing sales by offering more breadth and depth can potentially reduce inventory turnover and GMROI by stocking more SKUs Physical characteristics of the store Complementary Merchandise PhotoLink/Getty Images

Product Availability The percentage of demand for a particular SKU that is satisfied Level of support or service level The backup (buffer) stock in the model stock plan determine product availability The higher product availability, the higher the amount of backup stock necessary to ensure that the retailer won’t be out of stock on a particular SKU when consumers demand it

Importance of Backup (Buffer) Stock Choosing an appropriate amount of backup stock is critical to successful assortment planning If the backup stock is too low  loose sales and customers If the backup stock is too high  scare financial resources will be wasted on needless inventory that could be more profitably invested in more variety or assortment

Product Availability Factors considered to determine the appropriate level of buffer stock and thus the product availability for each SKU ABC Classification of merchandise (inventory) A – higher product availability B – medium product availability C – lower product availability is acceptable Fluctuations in demand Lead time for deliver from the vendor Frequency of store deliveries

Staple Merchandise Planning Buyer Determines: Basic Stock or Assortment Plan Level of Backup Inventory System: Monitors Inventory levels Automatically reorders when inventory gets below a specified level

Basic Stock Indicates the Desired Inventory Level for Each SKU Cost of Carrying Inventory Lost Sale Due to Stockout

Determining the Level of Backup Stock Higher product availability (service level) retailer wishes to provide to customers Greater the fluctuation in demand Longer lead time from the vendor More fluctuations in lead time Lower vendor’s Fill rate (% of complete orders received from a vendor) More Backup Stocks Needed with

Order Point the point at which inventory available should not go below or else we will run out of stock before the next order arrives Order point = sales/day (lead time + review time) + buffer stock Assume Lead time = 3 weeks, review time = 1 week, demand = 100 units per week Order point = 100 (3+1) = 400 Assume Buffer stock = 50 units, then Order point = 100 (3+1) + 50 = 450 We will order something when order point gets below 450 units.

Fashion Merchandise Management Systems The system for managing fashion merchandise categories is typically called a Merchandise Budget Plan

Merchandise Budget Plan Plan for the financial aspects of a merchandise category Specifies how much money can be spent each month to achieve the sales, margin, inventory turnover, and GMROI objectives Not a complete buying plan--doesn’t indicate what specific SKUs to buy or in what quantities Royalty-Free/CORBIS

Evaluating the Merchandise Budget Plan Inventory turnover GMROI, sales forecast are used for both planning and control After the selling season, the actual performance is compared with the plan Why did performance exceed or fall short of the plan? Was the deviation from the plan due to something under the buyer’s control? Did the buyer react quickly to changes in demand by either purchasing more or having a sale?

Open-to-Buy System The OTB system is used after the merchandise is purchased Monitors Merchandise Flow Determines How Much Was Spent and How Much is Left to Spend PhotoLink/Getty Images PhotoLink/Getty Images

Allocating Merchandise to Stores Allocating merchandise to stores involves three decisions: how much merchandise to allocate to each store what type of merchandise to allocate when to allocate the merchandise to different stores

Type of Merchandise Allocated Retailers classify stores according to the characteristics of the stores’ trading area The assortment offered in a ready-to-eat cereal aisle should match the demands of the demographics of shoppers in a local area

Timing of Merchandise Allocation to Stores Seasonality differences and consumer demand differences

Analyzing Merchandise Management Performance Three types of analyses related to the monitoring and adjustment step are: Sell through analysis ABC analysis of assortments Multiattribute analysis of vendors

Sell Through Analysis Evaluating Merchandise Plan A sell-through analysis compares actual and planned sales to determine whether more merchandise is needed to satisfy demand or whether price reductions are required.

ABC Analysis An ABC analysis identifies the performance of individual SKUs in the assortment plan. Rank - orders merchandise by some performance measure determine which items: should never be out of stock should be allowed to be out of stock occasionally should be deleted from the stock selection. A items: 5% of SKUs, represent 70% of sales B items: 10% of SKUs, represent 20% of sales C items: 65% of SKUs, represent 10% of sales D items: 20% of SKUs, represent 10% of sales

Multiattribute Method for Evaluating Vendors The multiattribute method for evaluating vendors uses a weighted average score for each vendor. The score is based on the importance of various issues and the vendor’s performance on those issues. C Squared Studios/Getty Images

Multiattribute Method for Evaluating Vendors

Evaluating Vendors A buyer can evaluate vendors by using the following five steps: Develop a list of issues to consider in the evaluation (column 1) Importance weights for each issue in column 1 are determined by the buyer/planner in conjunction with the GMM (column 2) Make judgments about each individual brand’s performance on each issue (the remaining columns) Develop an overall score by multiplying the importance of each issue by the performance of each brand or its vendor Determine a vendor’s overall rating, add the products for each brand for all issues